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The Skin In The Game Heuristic for Protection Against Tail Events

Review of Behavioral Economics, 2014, 1: 1–21

NYU Tandon Research Paper No. 2298292

12 Pages Posted: 26 Jul 2013 Last revised: 27 Jun 2017

Nassim Nicholas Taleb

NYU-Tandon School of Engineering

Constantine Sandis

Oxford Brookes University

Date Written: October 1, 2013

Abstract

Standard economic theory makes an allowance for the agency problem, but not the compounding of moral hazard in the presence of informational opacity, particularly in what concerns high-impact events in fat tailed domains. Nor did it look at exposure as an evolutionary filter that removes bad risk takers from the system so they stop harming others. But the ancients did; so did many aspects of moral philosophy. We propose a global and morally mandatory heuristic that anyone involved in an action which can possibly generate harm for others, even probabilistically, should be required to be exposed to some damage, regardless of context. While perhaps not sufficient, the heuristic is certainly necessary hence mandatory. It is supposed to counter voluntary and involuntary risk hiding and transfer in the tails. We link the rule to various philosophical approaches to ethics and moral luck.

Keywords: RIsk management, Heuristics, Black Swans, Fragility, Ethics, Moral Philosophy, Probability

Suggested Citation

Taleb, Nassim Nicholas and Sandis, Constantine, The Skin In The Game Heuristic for Protection Against Tail Events (October 1, 2013). Review of Behavioral Economics, 2014, 1: 1–21; NYU Tandon Research Paper No. 2298292. Available at SSRN: https://ssrn.com/abstract=2298292 or http://dx.doi.org/10.2139/ssrn.2298292

Nassim Nicholas Taleb (Contact Author)

NYU-Tandon School of Engineering ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Constantine Sandis

Oxford Brookes University ( email )

Gipsy Lane
Headington
Oxford, OX3 0BP
United Kingdom

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